The impact of economic sanctions on income inequality of target states.

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 by Sylvanus Kwaku Afesorgbor (RSCAS 2015-2016)* 

It is a popular claim in sanctions literature that the imposition of economic sanctions on target states is a double-edged sword that slays both the innocent civilians and political or economic elites alike. At the micro level, many studies have demonstrated that the imposition of sanctions affects different segments of the population. Notably, these studies have shown that the imposition of sanctions increases state-sponsored repression, contributes to the worsening humanitarian conditions of the civilian population, curtails the political and civil rights of citizens, exposes women to severe economic conditions in the target states, while democratic freedom deteriorates. More intriguing is the finding that the UN sanctions on Iraq resulted in more than a doubling effect on infant and under-five mortality rates. Similarly, it was reported that the US sanctions against Cuba contributed to a fall in nutritional value, rising infectious diseases, and violent deaths for the adult and aged population.

Departing from this strand of literature, which focuses on the micro-economic consequences of sanctions on the target states, our research examines whether there is any macro-economic evidence at the cross-country level that the imposition of sanctions has a deleterious effect on the overall measure of income inequality. More interesting, it also examines which segment of the population suffers the most in terms of loss of income share, as well as whether the employment of different instruments of sanctions have a differential effect on income inequality.

Relying on the widely-used Economic Sanctions Reconsidered database from the Peterson Institute for International Economics, as well as on the Gini-coefficients and income shares of populations belonging to various income quintiles from the Standardized World Income Inequality Data (SWIID) and the World Institute for Development Economic Research (WIDER), we test our hypotheses using the fixed effect panel estimator. Our empirical approach was robust as we used different quantitative methods to minimize any possible endogeneity between the imposition of sanctions and income inequality. In all, our study comprised of a cross-country analysis of 68 target states, spanning the period 1960-2008.

Our results provide robust macro-economic and empirical evidence that the imposition of sanctions exacerbates the income distribution in the target states. We find that the imposition of sanctions has a heterogeneous effect on different segments of the population. More precisely, sanctions have a negative effect on three of the lowest income groups by reducing their income shares but there is a positive effect on the income share of the population in the highest income group.  Thus, the imposition of sanctions increases the share of income favorably toward the highest income quintile and unfavorably toward those in the lowest income quintiles. This means that the imposition of sanctions makes the poor poorer and the rich richer.

We identify three main plausible reasons why sanctions skew the income distribution in an even manner. First, the isolation of sanctioned states enables the governments to veil their economic and repressive policies from the international community. Second, the political/economic elites could use the period of isolation to extract sanction rent and only use the rent to support themselves and their ‘selectorate’. Third, international organizations’ endeavors to reach out to the oppressed and poor in sanctioned states are sometimes constrained because the political elites may see them as appendages of the sanctioning states who may engage in espionage activities.

Focusing on the different instruments of sanctions, our results point to varying effects on income inequality. We find the use of financial sanctions has a more pronounced adverse effect compared to trade sanctions. This may be because, unlike trade sanctions, financial sanctions are difficult to circumvent. In addition, developing countries are also largely dependent on remittances and this channel of social protection is cut off with a ban on financial transfers.

In conclusion, the results from this paper are very relevant to current global governance as we witness the re-emergence of the sanction decade. The established link between income inequality and economic sanctions, in particular, the adversarial effect of sanctions on income distribution, sheds light on the effects of sanctions against target economies going beyond the intended political goal and setting the target states backward more than is intended. Thus, senders need to be made aware that their actions have an impact that is unintended or unfairly harmful. The target states, on the other hand, should be cautioned about ignoring the effects on income distribution that are a result of the imposition of sanctions, should they take too long to comply with the demands of the sanctioning states.

*Summary of a publication in World Development, 2016, 83, 1-11

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